How Bitcoin Works

Bitcoin is a "peer-to-peer virtual currency". That doesn't tell you much - here are the main differences of bitcoin compared to cash.

Bitcoin vs cash

Payments are public. It's possible to look at every single payment that's been made.

Payments are anonymous. Well, kind of anonymous. You need to give out a bitcoin address to receive a payment, but addresses are free and aren't linked to who you are.

Payments take time to be confirmed. You can make a payment and the receiver will see it almost immediately, but you have to wait for it to be accepted by other people (this is the "peer-to-peer" part).

Bitcoin can be created from nothing. Actually, not exactly from nothing - it's created by performing calculations in order to solve a puzzle.

Solving the puzzle

When you're a part of the bitcoin network, your computer can try to solve a kind of puzzle. When your computer solves the puzzle, you get 50 bitcoins. The puzzle difficulty keeps changing so that around 6 computers solve it per hour.

Why it has value

If bitcoin can be created by computers without you doing any work, you might wonder why it has any value. The answer is simple: it has value for the same reason the pieces of paper in your pocket (aka "cash") have value: people are willing to give you things in order to get it. There are even places where you can exchange bitcoins for cash.

What's it worth?

The price has been around $7 per bitcoin lately (as of May 17th, 2011). You can see the current price of bitcoins in US dollars at Mt Gox.

Generating 50 bitcoins

There's some good news and some bad news. The bad news is that because there's so much computing power generating bitcoin already, it would take an average computer years to generate 50 bitcoins. Instead of waiting for years, people decided to join forces. They've created pools of computing power - everyone uses their computer together, and when anyone in the pool solves the puzzle, everyone splits the profit.
You can start doing this right now. Go to the bitcoin generation page and you can put your computer to work creating bitcoins.